Avoiding Pre-paid Interest
I just received a good faith estimate of settlement costs. There is an 'interim interest charge" of almost $1,200 (21 days) listed. Is there any advantage or drawback to paying this interest as part of the closing costs? It doesn't affect your total interest costs, does it?
Thank you very much,
Tracy
Interest is paid in arrears. In other words, If you close on the 21st of the month, 21 days worth of the monthly interest belongs to the seller, and the rest of the month belongs to you. I'm not sure of your question, but I hope this helps.
jeff
Jeff,
I appreciate the reply, and apologize for being unclear.
My friend and I are buying a property. The 21 days of interest are being charged to us, not the seller. I've been told that this charge is for the period from when the loan is funded until the actual close date.
But I've also read in a couple of books ("Home Buying for Dummies" being one) that I should try to reduce the amount of days I'm being charged for. The example they gave was not to close on a Monday, because the loan will be funded on the previous Friday and you'll be paying 3 days interest.
The lender left a voicemail message saying that it really doesn't matter, that this "interim interest charge" was just a pro-rated amount of interest. In other words, if you close on the 9th day of the month, then you would owe interest for the 21 remaining days in that month.
My broker is out of town until Thursday, and I'm just trying to figure this out. Is 21 days a reasonable amount to pay in advance? Should I try and negotiate this charge with the lender?
Thanks very much for any help on this,
Tracy
My opinion is to close closer to the end of the month. That way the interest charges will be less, and less money will come out of your pocket. This is one way to lower closing cost. BUT!!! if it's a rental then I close on 2 or 3rd and have the rent credited to me, which also brings my closing costs down.
I believe that the following is happening.
They are charging the 21 days interest to you, so that your first payment isn't due on the first day of the following month.. I.e if you close if January, yur first payment won't be due until March 1. (skipping February). If they don't charge you up front for this, your first payment could be due February 1, and it would be for the principal amount plus 21 days of interest.
The payments are easier to calculate that way.
The above post was correct. The closer to the end of the month that you close, the interest prepayment amount will be lower, however,your first payment would still have the same due date.
I think.
Jeff
[ Edited by jeff12002 on Date 01/12/2004 ]
Quote:
On 2004-01-12 18:32, jeff12002 wrote:
I believe that the following is happening.
They are charging the 21 days interest to you, so that your first payment isn't due on the first day of the following month.. I.e if you close if January, yur first payment won't be due until March 1. (skipping February). If they don't charge you up front for this, your first payment could be due February 1, and it would be for the principal amount plus 21 days of interest.
The payments are easier to calculate that way.
The above post was correct. The closer to the end of the month that you close, the interest prepayment amount will be lower, however,your first payment would still have the same due date.
I think.
I think you're right.
A similar thing just happened to me. I closed on the 5th with $390+ in interest charges.
I don't have a mortgage payment until March 1.
Thank you to everyone for the help. Things are getting clearer, but I'm still a little lost.
Is this right?: If I close January 25, I would pay 5 days interest, which would cover the period from January 25 to January 31. My next payment would be March 1, which covers February 1-February 29?
So in spurgeOn's situation above, the $390 he paid covered interest from January 5-January 31?
It's embarrassing how little I know. I'm very grateful for this assistance.
Tracy
I believe that you would be paying the principal for March and the Interest for February on your March 1 payment. With regards to closing on the 25th you are correct. You'll only be paying interest from the 25th to the end of the month.[ Edited by jeff12002 on Date 01/12/2004 ]
Thanks again for the reply- I think I (finally) get it
Tracy
I'd be curious of Lucius's response but my guess is that these are junk fees to scam you from your money. I have never experienced such although I do not use banks. I use private investors and sub2, etc.